UK inflation at fresh 40-year peak.

Source reports that the ECB was considering a rate hike of 25 basis points or 50 basis points at this week’s policy meeting. Markets had priced in around 30 basis points of tightening and the increased possibility of a larger rate hike triggered fresh Euro buying. Money markets also moved to price in 100 basis-points of tightening by September.

There were also reports that ECB President Lagarde was redoubling the push to get a deal done this week on the ECB peripheral bond tool.

Markets were continuing to monitor the situation surrounding the Nord-Stream gas pipeline. Although there was a high degree of uncertainty, the latest source reports suggested that gas flows will resume on Thursday at reduced levels.

Any resumption of supplies would provide an element of relief.

Italian political developments will be watched closely on Wednesday with Prime Minister Draghi scheduled to outline his plans in the Senate and announcing whether he is willing to continue in office.

Hopes for a resumption of gas flows through Nord-Stream limited immediate fears surrounding the German economy and heled underpin risk appetite with markets also hoping that peak pessimism has been seen in global markets.

US housing starts declined to an annual rate of 1.56mn for June from a revised 1.59mn previously and slightly below consensus forecasts. Building permits were unchanged at 1.69mn and above market expectations of 1.65mn.

Reserve Bank of Australia Governor Lowe stated that inflation could increase to around 7.0%  and the central bank will have to increase interest rates further with a the assumption that rates will have to raise rates to at least 2.5%.

Bank of England Governor Bailey stated that there was some evidence that supply-chain issues were starting to ease and that the economy is slowing. Nevertheless, he reiterated inflation concerns and stated that a 50 basis-point rate hike would be on the table at the August meeting.

He did, however, insist that a 50 basis-point rate hike was not locked in and that the committee will deliberate over the decision.

The headline UK CPI inflation rate increased to 9.4% from 9.1% which was slightly above consensus forecasts of 9.3% and the highest reading for over 40 years. The underlying rate edged lower to 5.8% from 5.9% and in line with expectations.

Hopes for a resumption of gas supplies through the Nord-stream pipeline underpinned Euro confidence during Tuesday. The Euro was also boosted by markets pricing in more ECB tightening.

US influences were relatively limited during the day. A small increase in US yields pulled the dollar away from intra-day lows. EUR/USD strengthened to 2-week highs close to 1.0270 before consolidation below 1.0250.

The yen was held in relatively tight ranges ahead of Thursday’s Bank of Japan policy announcement. USD/JPY recovered from lows below 137.50 to trade around 138.00.

The Swiss franc was resilient despite stronger equity markets. USD/CHF dipped to lows near 0.9650 before a recovery to 0.9690.

Sterling drew limited support from BoE Governor Bailey’s comments with global influences also having a significant impact. GBP/USD peaked at 1.2045 before fading to just above 1.2000.

Commodity currencies were boosted by stronger equity markets and a weaker US dollar. Hawkish rhetoric from RBA Governor Lowe also provided support. AUD/USD posted strong gains to just above 0.6900 on Tuesday and secured a further net advance to 3-week highs at 0.6920 on Wednesday before consolidating. USD/CAD dipped to lows near 1.2880 on Tuesday with 2-week lows around 1.2860 on Wednesday.

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